Global markets are starting to show signs of recovery as the US Federal Reserve (Fed) hinted that interest rates may be cut earlier than previously expected, supported by news of a ceasefire between Israel and Iran.
Although the Fed is still sticking to a cautious approach, Fed Chairman Jerome Powell acknowledged that inflationary pressures are easing and consumer spending is slowing. This increases investor confidence that a change in monetary policy may occur sooner.
At the same time, geopolitical tensions have also eased as both parties in the Middle East, Israel and Iran, are seen respecting the ceasefire agreement, although there are still minor violations.
Energy markets are starting to recover slightly after President Donald Trump hinted that sanctions on Iranian oil exports may be eased, especially for buyers from China.
Potential for Interest Rate Cuts
In his statement to Congress, Powell again emphasized the 'data-dependent' approach, but this time his tone was more open to policy easing measures if inflation continues to decline and the job market begins to stabilize.
Powell's key quote: "There are many paths to take. If inflation continues to decline and the labor market begins to stabilize, a rate cut becomes more appropriate."
Market Implications: Fed Funds futures are now pricing in two rate cuts by year-end, with September seen as the most likely month. In fact, some traders are already eyeing a possible change as early as July.
FX Opportunities: If the disinflationary trend continues, the US dollar risks further weakness. The Euro (EUR), Pound (GBP), and emerging market currencies are expected to benefit.
Fed Officials' Tone Consistent, Cautious, and Responsive to Data
Several senior Fed officials also echoed Powell's sentiment:
Neel Kashkari (Minneapolis): Warned that tariffs could slow progress in bringing down inflation.
John Williams (New York): Said current interest rates are still relevant, as the policy impact has not yet been fully felt.
Michael Barr (Governor): Disinflation could reverse if external pressures increase.
Loretta Mester (Cleveland): Borrowing costs (interest rates) will remain high for a while.
Susan Collins (Boston): Fed should maintain ‘somewhat tight’ approach for now.
Geopolitical Risks Easing, Oil and Sensitive Currencies Recover
While not yet fully stable, the ceasefire between Israel and Iran appears to have eased tensions somewhat. Interestingly, President Trump appears open to easing Iran’s oil sanctions on China.
Oil Prices: Brent rebounds slightly after earlier declines, supported by expectations of better supply.
FX Market Impact:
AUD, NZD, strengthen on recovering risk sentiment.
Oil-linked currencies such as CAD may face pressure if global supply stabilizes.
Australia: Weak Inflation Data, RBA Expected to Cut Rates
The Australian dollar (AUD) weakened after weaker-than-expected CPI data added to expectations that the Reserve Bank of Australia (RBA) will start cutting interest rates in the near future.
Markets now expect interest rate cuts as early as July, with another easing move expected by October.
Market Risks and Trading Strategies
EventsMarket Impact
Fed cuts rates early Positive for EUR, GBP, negative for USD
Mideast ceasefire failure Positive for gold, JPY, CHF and oil prices rise
Inflation surges Fed likely to remain hawkish, USD strengthens, pressure on risk assets (Gold)
RBA cuts AUD weakens
Trump eases Iran sanctions Oil supplies rise
Conclusion: World on the verge of easing, but risks remain
The global macroeconomic map is changing. From ‘crisis mode’, central banks are now cautiously re-adjusting monetary policy. The Fed may start easing policy soon, but it all depends on current data.
Meanwhile, geopolitics continues to be a backdrop that cannot be ignored. Even if tensions start to subside, they could flare up again at any time.
Traders' Priorities:
Closely monitor US inflation and employment data such as PCE and NFP, Jobless Claims.
Remain flexible, geopolitical changes could cancel out expectations of a sudden rate cut.
